Why Stock Picking Is Important In Addition to Owning ETFs

For passive investors, having access to low-cost index exchange traded funds (ETFs) is one of the best ways to build wealth over long periods of time.

Some of the most iconic investors of all time including Warren Buffett have echoed the value of ETFs for investors not willing to put the time and energy into researching individual stocks.

After all, the time and stress it takes to be up to speed with the ins and outs of dozens of companies is likely not worth the investment for most – the alternative, picking stocks on a whim or paying a high-priced expert to pick stocks for you, also may not seem very attractive for investors looking for a way to compound money over long periods of time.

With most ETFs offering a well-diversified portfolio of stocks at a management fee typically less than 1% per year, and empirical evidence showing the average fund manager can’t beat the S&P 500, index ETFs may seem like the way to go.

It should be noted, however, that the typical Index ETF is now much more heavily weighted toward only a handful of tech stocks, increasing market exposure to a narrow slice of the economy, potentially taking away from the diversification benefits one expects when buying into an index ETF.

Beefing up exposure to under-represented sectors via sector ETFs is one way to balance out some of the market risk present in index ETFs.